On August 7, 2025, the Jerusalem District Court (Hon. Judge Avigdor Dorot) issued a judgment on an appeal filed by Ir Shalem, the insurance agency of the Bank of Jerusalem, against the refusal of the VAT Authority to change its VAT classification from “Registered Dealer” to “Financial Institution”, consistent with the Bank’s classification.
The court accepted the company’s appeal, which was represented by our firm, in its entirety, and ruled that pursuant to Section 58 of the VAT Law, the company’s classification has to be changed to “Financial Institution” (Tax Appeal 47371-10-20 Ir Shalem Insurance Agency (1996) Ltd. v. Tax Authority).
The court held, based on a substance-over-form test, that the company’s activity should be regarded as an integral part of the financial activity of the bank (which is a Financial Institution), given that the company functions as the bank’s extended arm and in light of the regulatory restrictions that apply to it, which link and limit it to the bank’s activity only.
The court noted that, as the insurance agency of a bank, the company is fully owned and controlled by the bank. Its business is legally limited solely to providing insurance agency services to the bank’s customers who have taken out mortgage loans, exclusively for the purpose of insurance coverage required for those loans. Furthermore, this coverage is restricted to life and property insurance. The court ruled that the company’s activity is intended to promote the bank’s interests and operations, and that the company is completely dependent on the bank’s financial activities, with the bank serving as its economic lifeline. According to the law, the company may only serve the bank, and without the mortgage loans provided by the bank—and the bank’s requirement that customers insure those loans—the company would have no business existence.
The court rejected the VAT authority’s argument that changing the classification to a “Financial Institution” would lead to “discrimination.” This is, among other things, due to the equivalence in indirect tax treatment between classifying the entity as a Dealer or as a Financial Institution. The court further emphasized that the company’s classification was determined based on its activities and characteristics. The VAT Authority’s claim, that changing the company’s classification would result in a VAT exemption for the bank on dividends received from the company, is not relevant to the company’s classification itself, but rather a consequence of applying the VAT Law provisions following the correct classification of the company as a “Financial Institution”.
The judgment clarifies the applicable tests for changing the classification of related companies, particularly concerning subsidiaries of Financial Institutions. We recommend that Financial Institutions review how their subsidiaries are classified in light of the judgment, whether as a “Dealer” or as a “Financial Institution.”
Ir Shalem was represented by Adv. Ofer Granot (Head of Tax Litigation), Adv. Iris Weinberger (Head of the Indirect Taxes Department), and Adv. Moti Fogel (Partner in the Indirect Tax Department).
For your convenience, here is the link to the judgment.
